Sunday, June 28, 2009

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Surrounded by a slow market of newly low-priced homes, courtesy of the housing downturn, some cities continue to maintain a housing market with land remaining expensive. In an article on usnews.com, Santa Barbara was placed on the list of “10 Pricey Cities That Pay Off.” Joining Santa Barbara in the list of 10 are Boston; Honolulu; Los Angeles; New York City; San Diego; San Francisco; San Luis Obispo; Salinas, California; and Naples, Florida.

In his assessments, University of Michigan economist David Albouy examined both the quality of life, and the trade productivity found in the cities.

The value of a home is based on much more than the cost of the house itself; the quality of life - including weather, distance from the coast, recreational opportunities nearby - proves crucial in the evaluation of a property’s net worth. In addition, cities with more business opportunities or available resources are considered to have a better trade productivity - something that significantly affects certain career options.

The Santa Barbara metro area was found to have the second-highest quality of life, and the third-highest trade productivity.

While interesting, I might have taken a different approach to writing Lopez's article.

First, I would note that David Albouy is an assistant professor at UM whose research challenges traditional quality of life metrics that focus primarily on local cost-of-living vs. local wages. That is why he's interested in putting numbers to the abstract notion of "amenities". When amenities are added to cost-of-living, Albouy finds that people prefer to live in larger cities with good weather that are close to the ocean. This contradicts traditional models which predict people prefer to live in less urban areas. See Albouy's bio here:

Second, I would point out that the US News & Report article (written by junior reporter Matthew Bandyk) is only a summary of the recent paper written by Dr. Albouy. Bandyk's article is confusing because it doesn't define the meaning of terms used to describe geographical regions used in the study. Bandyk alternately uses the terms "city" and "metreopolitan area". If you read Dr. Albouy's paper:

you quickly find out that the geographic regions his study uses are pretty big and are *not* cities in the everyday sense. As Albouy says in his paper:

"Cities are defined at the Metropolitan Statistical Area (MSA) level using 1999 OMB definitions. Consolidated MSAs are treated as a single city (e.g. San Francisco includes Oakland and San Jose), as well as all non-metropolitan areas within each state."

So this is why the numbers cited for Santa Barbara and San Luis Obispo approach county, not city, populations. But based on Bandyk's writing, you'd think he was talking about cities! This leads to more confusion because, as we know, its harder to make generalizations about the county of Santa Barbara than the city of Santa Barbara.

In summary, I don't think the US News & Report did a very good job reporting the story. But that doesn't mean Albouy's paper is to blame. He's doing what many economists do, which is to build better and more predictive economic models. I would not necessarily dismiss Albouy's work as "superficial" based on Bandyk's article.